When the US imposed a global ban on sales of advanced semiconductor chips incorporating sensitive US-sourced technology to Huawei two years ago, Paul Trilio, head of geotechnology at Eurasia Group, described it as a “lethal blow to China’s most important technology company,” which he projected would impact all of the company’s business lines.
Notwithstanding these dire projections, Huawei’s 2021 financial results posted at the end of March demonstrate that, to paraphrase Mark Twain, the rumors of the company’s demise have been greatly exaggerated.
Hampered by the chip ban, as well as by “supply continuity challenges” and slowing 5G (fifth-generation telecom technology) demand in China, the company’s overall revenues did decline 28.5% year on year from 891.3 billion yuan in 2020 to 636.8 billion yuan (US$96.4 billion) in 2021, marking the first drop in annual revenues for the company dating back to 2002, according to reports published by the company.
However, Huawei’s net profits surged from 64.6 billion yuan in 2020 to a record of 113.7 billion yuan ($17.22 billion) in 2021, a remarkable 75.9% jump. The company attributed the gains in profitability to investments in innovation, improvements to operating efficiency and rebalancing of its product lines to focus on more profitable business segments that are not affected by the sanctions.
The impact of the chip ban has been felt most keenly in Huawei’s smartphone business, where according to research firm Dell’Oro Group, the company’s share of the global market experienced a precipitous 81.6% decline year on year in 2021, dropping the company’s global market share to only 3%, falling well behind rivals Samsung, Apple, Xiaomi, Oppo and Vivo.
Huawei had been ranked third globally in handset sales in 2020, shipping 170 million handsets, as the company drew down on its stockpiles of chips accumulated prior to the chip ban taking effect. Huawei spun off its budget handset unit Honor in late 2020, which also impacted smartphone sales.
Huawei retains top spot in 5G infrastructure
The focus of the chip ban, however, has always been Huawei’s 5G base-station business, which the US has targeted on the grounds that the company’s network equipment poses a national-security risk. The US has persuaded many of its allies to follow suit and ban Huawei equipment from their 5G networks.
However, the US has never published any evidence to support the claim that Huawei has actively facilitated espionage activities by Chinese spy agencies, and critics have expressed concerns that the US campaign against Huawei may be driven principally by competitive interests, rather than national-security interests, given Huawei’s dominant position in 5G globally.
When Huawei chief financial officer Meng Wanzhou was taken into custody in Canada at the request of US officials in December 2018, at the same time that the US was endeavoring to persuade Canada to ban Huawei 5G equipment, the Financial Times observed that her arrest risked being interpreted as “the use of American power to pursue political and economic ends rather than straightforward law enforcement.”
The release of Meng last September, with little more than a slap on the wrist, has only reinforced these concerns.
If the chip ban was intended to cripple Huawei’s ability to compete in the 5G infrastructure market, then it can only be viewed only as a failure to date, as the company still takes the top spot in the global rankings according to Dell’Oro Group, with a 28.7% global market share in 2021, nearly equaling the combined market share of Ericsson and Nokia, its closest two competitors.
However, some industry analysts predict that Huawei will face increasing headwinds going forward – the company’s share of the global 5G base-station market peaked at the start of the first quarter of 2020 and experienced a marked decline through mid-2021, and signs point to the potential for further significant declines in market share outside of China as more European Union countries are expected to join the US ban of Huawei 5G equipment.
But the cost of banning Huawei is increasing. This year, the US Federal Communications Commission (FCC) reported that estimated costs for “ripping and replacing” Huawei and ZTE equipment in the US had risen from $1.8 billion to $5.6 billion.
The ban is also impacting network coverage in rural America, where Chinese network equipment has had a 25% market share. The UK and EU are facing calls for delays in removing Huawei kit from their telecommunications networks, for similar reasons.
Even if the US-led ban among key Western countries holds, there are still many positive signs for Huawei’s 5G prospects globally.
In June last year, London-based think-tank the Overseas Development Institute (ODI) concluded that “a common security policy towards Chinese investment in digital infrastructure is unlikely.”
The study added that “growing concerns about technology dependence are prompting some wealthier developed countries to reassess engagement with China in digital infrastructure construction, but poorer developing countries appear reluctant to follow suit.”
ODI noted that Huawei is able to leverage its price advantage coupled with policy loans from leading Chinese banks to beat the competition in many emerging markets, citing reports, for example, that Huawei and ZTE account for up to 60% of wireless-equipment sales in Africa and the Middle East. Other analysts have similarly found that developing economies continue to welcome Huawei kit.
As reported by Forbes, Counterpoint Research and smartphone brand Realme have projected that after 5G adoption rates in developed markets reach 80-90% in the next few years, then the next wave of dramatic growth for 5G will be driven by emerging markets with large populations of increasingly connected young consumers. These are the markets Huawei is poised to dominate.
Innovating around the chip ban
Although the chip ban still impacts Huawei’s 5G infrastructure business, base-station equipment requires fewer semiconductors than smartphones, and the company was able to stockpile sufficient components to sustain production over the short term.
Both the Chinese government and Huawei want to achieve self-sufficiency in semiconductors, but this has proved to be an elusive goal, which cannot be attained in the near term.
However, at the recent press conference announcing the 2021 annual report, Huawei’s rotating chairman Guo Ping hinted that more innovations were in store to help mitigate the impact of the chip ban, indicating that the company would begin using advanced chip-packaging technology. Chinese industry experts at the World Semiconductor Conference held in Nanjing in June of last year had called on the company to pursue the technology.
Speaking to the South China Morning Post, chip-packaging technology expert Wang Min explained that Huawei may be able to use one of two possible solutions to work around the US chip ban: First, the company can “use larger nodes to produce chips at the expense of power consumption,” or alternatively, it can “assemble different types of chips that can bought in an SiP [system in package] to make a complete final chip.”
This SiP option also sacrifices power consumption, according to Wang, but it has a shorter development cycle and lower overall costs.
The natural limitations of sanctions
While such a technology work-around could circumvent the ban on Huawei’s purchases of advanced semiconductor chips, it would not address the current ban on procurement of Huawei 5G kit in much of the developed world.
But as noted, this still leaves open the markets with the highest future growth potential in the vast majority of countries around the world that do not share the network-security concerns raised (but not publicly substantiated) by the US.
Moreover, many of these same countries view the unprecedented financial sanctions imposed on Russia by the West with increased wariness, accelerating the growing de-dollarization trend in an effort to avoid “financial excommunication” if they were to cross any of the intentionally veiled red lines set by the US.
This in turn may make it even more challenging for the US to persuade less developed countries to join the Huawei 5G ban if this is seen as a further example of the US weaponizing its dominant position in the global system rather than functioning as a fiduciary of that system for the benefit of all market participants.
Huawei has now demonstrated that business strategy and technical innovation can be another arrow in the sanctions countermeasures quiver at the corporate level, as the company reinvents itself to ensure that it not only can continue to survive the short-term impact of the sanctions but also position itself to thrive in the medium to longer term when market dynamics turn more to its favor.
Against that backdrop, it is perhaps noteworthy that the company’s 2021 financial results were announced by CFO Meng Wanzhou, in her first major public appearance since her release – an apt symbol of Huawei’s phoenix-like rise from the ashes of what were expected by industry experts to be ruinous sanctions.
Far from suffering a “lethal blow” from the sanctions, by successfully negotiating its way through the sanctions minefield, Huawei may in fact have provided another demonstration of the natural limits of economic sanctions.